This special report just released by Fulcrum Partners, LLC details fundamental implementation, design, and operation considerations of Nonqualifed Deferred Compensation plans for executives relating to FICA taxes (i.e., Social Security and Medicare taxes). Detailed in the report are the special rules applicable to executive plans for FICA tax compliance that every professional handling payroll should know.

1. Washington Report
FICA Taxes & Nonqualified Deferred Compensation
Fundamental Rules & Planning Considerations
(June 19, 2014) Ponte Vedra Beach, Florida
Executive benefits consulting firm, Fulcrum Partners LLC, is pleased distribute this
AALU Washington Report to its clients and friends. This continuing series of
articles is intended to provide deep insight into trends, events, and issues that
impact the design and operation of nonqualified executive benefit plans.
FICA Taxes & Nonqualified Deferred Compensation
Fundamental Rules & Planning Considerations
SYNOPSIS: Properly implemented NQDC plans defer income tax until the time of payment of
the deferred compensation. The Internal Revenue Code ("Code"), however, generally does not
allow the deferral of FICA taxes (i.e., Social Security and Medicare taxes), which typically are
payable at the time the NQDC amounts are deferred (or for amounts subject to vesting, when
those amounts vest). If these FICA timing rules are not followed, NQDC amounts, including
earnings on these amounts, will be subject to FICA taxes at the time of payment.
TAKE AWAYS: Plan sponsors maintaining NQDC plans should fully understand the special
rules applicable to these plans for FICA tax compliance and make any necessary adjustments to
payroll and related systems to accommodate these rules. Confirming the proper crediting of
"earnings" under a NQDC plan will help minimize the amount subject to FICA taxation. Further,
although the applicable rules generally do not defer FICA taxation on NQDC benefits, ensuring
FICA taxation on NQDC amounts occurs upon deferral or vesting, as opposed to when paid,
should minimize the total FICA taxes owed with respect to the NQDC amounts overall.
Fulcrum Partners stands ready to assist any non-qualified plan sponsor who may have concerns
about their deferred compensation arrangements and FICA tax compliance.

2. OVERVIEW - FICA TAXES and TIMING RULE
Generally, FICA taxes on wages consist of (1) Social Security taxes up to a specified maximum
threshold (referred to as the "Social Security wage base," set at $117,000 for 2014); and (2)
Medicare taxes on the entire wage amount. Generally, these taxes are owed when the wages are
paid to the employee. Pursuant to a "special" FICA timing rule under Internal Revenue Code
("Code") § 3121(v), however, amounts deferred under a NQDC plan typically are treated as wages
subject to FICA taxes at the time the services giving rise to the compensation being deferred are
performed, even though payment of the wages is deferred. If, however, those deferred amounts
are subject to a "substantial risk of forfeiture" (i.e., the participant's rights to the deferred amounts
are subject to a vesting requirement), FICA taxes are payable when the substantial risk of
forfeiture lapses.
APPLICATION OF SPECIAL FICA TIMING RULE TO NQDC PLANS
Specific application of the special FICA timing rule to NQDC plans depends on the plan type.
Defined Contribution Arrangements. Defined contribution arrangements, referred to as
"account balance plans" under the applicable Treasury Regulations, are plans where amounts
deferred and earnings thereon are credited to a participant's account, and the participant is
entitled to the account balance at payment. The application of the special FICA timing rule to
these arrangements is straight-forward: FICA taxes are paid when the amounts are deferred
unless they are subject to a vesting schedule, in which case, FICA taxes are payable when the
participant becomes vested in his or her account balance (and, then as further deferrals are made
thereafter).
Defined Benefit Arrangements. The special FICA timing rule is not as easily applied to
defined benefit arrangements, referred to in the applicable Treasury Regulations as "non-account
balance plans," which promise a specified benefit to participants regardless of what amount, if
any, is credited to a participant's account. Under these arrangements, the benefit payable to the
participant may fluctuate after the services are performed and the participant's rights to the
benefit are vested. Without application of the special FICA timing rule, an overpayment of FICA
taxes could occur if the value of the benefit subsequently declines. Accordingly, the special FICA
timing rule has been interpreted in the applicable regulations to allow a delay in FICA taxation of
amounts deferred under non-account balance plans until the amount payable becomes
"reasonably ascertainable."
For this purpose, an amount is "reasonably ascertainable" as of the first date on which the amount,
form and commencement date of benefit payments are known, and the only actuarial factors or
other assumptions regarding future events or circumstances needed to determine the amount
deferred are interest and mortality. Generally, an amount becomes "reasonably ascertainable" on
the date on which the participant terminates employment.[1] Depending on the date for payment
set under the plan at the time of deferral, this rule may result in the deferral of FICA taxation until
the time of benefit payment or commencement (e.g., termination of employment).
NONDUPLICATION RULE
If amounts are taken into account for FICA tax purposes in accordance with the special FICA
timing rule, the amount deferred - plus any earnings on the deferred amounts - are not subject to
FICA taxes at any later date. However, if the FICA taxes are not taken into account as provided
under the special rule, then the IRS has interpreted this rule to mean that FICA taxes will apply

3. to the deferred amounts, and earnings thereon, when they are later paid to the participant. This
is true regardless of how many years may have passed between the time when FICA taxes were
properly payable on the deferred amounts and when the deferred amounts are paid. As described
in greater detail under "Practical Considerations" below, this result could generate a significantly
greater amount of FICA taxes than if the special FICA timing rule had been followed.
"EARNINGS" UNDER THE NONDUPLICATION RULE
Under the nonduplication rule, amounts are deemed "earnings" eligible for exclusion from FICA
taxes at the time of payment only to the extent they (1) are based on the performance of a
predetermined actual investment or (2) do not exceed a reasonable rate of interest.
Pre-Determined Actual Investment Performance. Applicable Treasury Regulations
provide that the rate of return on a predetermined actual investment for any period means the
rate of total return (including increases or decreases in fair market value) that would apply if the
account balance were, during the applicable period, actually invested in one or more investments
that are identified in accordance with the plan before the beginning of the period (regardless of
whether assets are actually invested in that manner). This means of crediting earnings is probably
the most popular method of crediting earnings under nonqualified deferred compensation plans,
whereby participants are permitted to select among various hypothetical investment options
offered by the employer, which may, for example, be those available under a variable life insurance
contract or pursuant to a mutual fund platform.
Reasonable Rate of Interest. The regulations do not define a "reasonable" rate of interest, but
do indicate that the creditworthiness of the employer is not a factor that can be taken into account
in determining the reasonableness. Thus, the better view is probably that a reasonable rate of
interest is one that the participant could expect to earn in the market on a fixed return investment.
If earnings are not determined by reference to a predetermined actual investment and exceed a
reasonable rate of interest, the amount in excess of the midterm applicable federal rate is
considered an additional deferral under the plan, subject to FICA taxation at the time it is credited
or, if later, when the participant becomes vested in his or her plan account.
Caution: The applicable Treasury Regulations provide that amounts credited to a participant's
account will not be treated as based on a predetermined actual investment, if there is a floor on
the amount that will be credited for any period, even if that floor is zero (i.e., the plan merely
protects the participant against any investment losses). Thus, such a guarantee should not be used
unless the employer and the plan participant are willing to be exposed to additional FICA wages
if amounts credited to the account for a period under the earnings arrangement exceeds the
midterm AFR.
PRACTICAL CONSIDERATIONS
When applicable, it is critical that employers maintaining NQDC plans comply with the special
FICA timing rule to avoid adverse tax consequences. Although the special FICA timing rule does
not defer the timing of FICA taxation, an employer's failure to properly withhold and pay FICA
taxes on amounts deferred under a non-account balance (e.g., defined benefit) plan in accordance
with the special rule likely results in significantly higher FICA tax burdens for the participant and
the employer. First, otherwise FICA-excluded plan earnings become subject to FICA tax. Second,
and more significantly, if the deferred compensation amount is not taken into account pursuant
to the special FICA timing rule, then each subsequent annual payment of the participant's

4. deferred compensation benefit will be subject to Social Security taxes (at 6.2% on up to the Social
Security wage base for the year of payment) and Medicare taxes (at 1.45% [2] on the full amount),
as opposed to a single payment of these taxes on the deferred amount based on the special timing
rule and the Social Security wage base then in effect.
To illustrate, assume that in 2014: (1) a non-married participant earns $200,000 in wages, (2)
the participant's benefit under a defined benefit plan first becomes reasonably ascertainable, and
(3) the amount the participant has deferred under the plan equals $1 million:
* If the deferred compensation is taken into account in determining the participant's FICA taxes
for 2014 pursuant to the special FICA timing rule, both the participant's wages and deferred
compensation amount would be subject to Medicare taxes (equal to approximately $26,400)[3],
but only $117,000 of the participant's wages would be subject to Social Security taxes (equal to
approximately $7,254).[4] Thus, $83,000 of excess wages and the $1 million of deferred
compensation would be excluded from Social Security taxation. In addition, the participant will
never owe any further Social Security or Medicare taxes with respect to that deferred
compensation amount (or earnings thereon) when paid as an annual benefit.
* In contrast, if the special FICA timing rule is not applied in 2014 and the participant later
receives an annual benefit payment of $100,000 (and earns no other wages), the participant (and
the employer) would pay total FICA taxes of $7,650 ($6,200 in Social Security taxes and $1,450
in Medicare taxes) each year during which the participant receives a benefit under the plan. No
amount of the payments would escape Social Security taxation.
TAKE AWAYS
* Fulcrum Partners can help its clients fully understand the special rules applicable to NQDC plans
for FICA tax compliance and provide the tools for the client to make any necessary adjustments
to payroll and related systems to accommodate these rules.
* Confirming the proper crediting of "earnings" under a NQDC plan will help minimize the
amount subject to FICA taxation.
* Further, although the applicable rules generally do not defer FICA taxation on NQDC benefits,
ensuring FICA taxation on NQDC amounts occurs upon deferral or vesting, as opposed to when
paid, should minimize the total FICA taxes owed with respect to the NQDC amounts overall.
NOTES
_______________
[1] Note that there is an additional rule that allows an employer to take amounts deferred under non-
account balance plans into account for FICA tax purposes before they are reasonably ascertainable, if a
"true-up" calculation is done at the time the amount deferred does become reasonably ascertainable. Given
the actuarial complexity and expense involved in this approach, employers rarely take advantage of this
rule.
[2] Plus an additional 0.9% Medicare tax on wages in excess of $200,000 (single filer) or $250,000
(married, joint filers).
[3] Represents 1.45% of $1.2 million, plus the additional 0.9% Medicare tax on wages in excess of $200,000
(for a single filer).
[4] 6.2% of $117,000.

5. For more information about the topic, please contact press@fulcrumpartnersllc.com.
About Fulcrum Partners LLC :
Fulcrum Partners LLC is the nation's leading and largest executive benefits consultancy. It's
consultants focus on an integrated approach to the design, financing and plan administration of
executive benefit programs. Fulcrum Partners offers its clients a unique combination of industry
experts with diverse skill sets, targeted experience, and in-depth expertise in executive
compensation and benefits consulting. Fulcrum Partners is a wholly independent, member-
owned firm dedicated to help clients enhance their Total Rewards Strategy.
About AALU:
The AALU's mission to promote, preserve and protect advanced life insurance planning for the
benefit of our members, their clients, the industry and the general public reflects each of our
primary issue priorities.
Contact:
Fulcrum Partners
Bruce Brownell
904.296.2563
press@fulcrumpartnersllc.com
AALU
James Lee
703.641.8128
lee@aalu.org
________________________________________
DISCLAIMER
In order to comply with requirements imposed by the IRS which may apply to the Washington
Report as distributed or as re-circulated by our members, please be advised of the following:
THE ABOVE ADVICE WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE
USED, BY YOU FOR THE PURPOSES OF AVOIDING ANY
PENALTY THAT MAY BE IMPOSED BY THE INTERNAL REVENUE SERVICE.
In the event that this Washington Report is also considered to be a "marketed opinion" within the
meaning of the IRS guidance, then, as required by the IRS, please be further advised of the
following:
THE ABOVE ADVICE WAS NOT WRITTEN TO SUPPORT THE PROMOTIONS OR
MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED BY THE WRITTEN
ADVICE, AND, BASED ON THE PARTICULAR CIRCUMSTANCES, YOU SHOULD SEEK
ADVICE FROM AN INDEPENDENT TAX ADVISOR.

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Investment Advisory Services offered through ValMark Advisers, Inc., which is an SEC
Registered Investment Advisor. Fulcrum Partners LLC is a separate entity from ValMark
Securities, Inc. and ValMark Advisers, Inc.